The immediate costs of a low-carbon economy transition are significantly outweighed by the costs of continued inaction, research from Ortec Finance has found, estimating that a failed low-carbon transition could wipe up to 33 per cent off pension fund returns worldwide by 2050. 

As part of its analysis, Ortec Finance applied its proprietary 2025 climate scenarios to the investment portfolios of 180 pension funds across the six largest global pension systems, revealing the consequences of further delaying the net-zero transition.

This showed that climate change is set to reshape global growth expectations by disrupting the fundamental drivers of economic stability, with both transition and physical risks directly affecting growth, inflation, and long-term financial stability.

Indeed, Ortec found that, in a high warming scenario, unaddressed climate change could push global GDP over 10 per cent below current expectations by 2050, while projections beyond 2050 show further deterioration where developed economies risk GDP growth stalling completely between 2050 and 2075.
 
This will also have significant implications for pension funds, as the modelling suggested that a failed low-carbon transition could wipe 33 per cent off pension fund returns worldwide by 2050 in a high warming climate scenario that tracks the current trajectory of global warming. 

By 2028, the average impact on nominal pension fund portfolio returns is modest at 2 per cent, widening to 6 per cent in 2035 and deepening to 33 per cent in 2050.
 
These risks are not currently being priced in either, as Ortec argued that any physical risks that are uninsurable or irreversible, such as climate tipping points, remain underrepresented in asset valuations, creating a disconnect between current pricing and potential escalating physical risks, which can leave pension fund portfolios highly exposed to underestimated downside risks.

The UK stood out for the widest dispersion: some maturing defined benefit (DB) schemes experience relatively limited drawdowns, while equity-heavy defined contribution (DC) schemes faced substantially larger losses.

However, Ortec's modelling showed that the long-term outlook for pension fund returns was much better under a successful transition, despite causing steeper drawdowns in the short-term.

“By 2035, performance of the global pension portfolios under high warming scenarios is already worse than under the worst-case transition scenarios, highlighting the catastrophic implications of not transitioning,” Ortec Finance climate risk specialist, Doruk Onal, pointed out.

By 2050, the gap will have almost completely reversed, with the high-warming scenario showing 33 per cent declines compared to only 8 per cent in a delayed net-zero or 4 per cent in a net-zero financial crisis scenario.

Ortec pointed out that, when inflationary pressures are factored in, the outlook becomes "even more concerning", as real returns suffer an even steeper erosion, especially under the high warming scenario.

“This report clearly shows that the immediate costs of transitioning to a low-carbon economy are significantly outweighed by the long-term physical impacts and escalating costs of continued climate inaction," Ortec Finance managing director, climate scenarios and sustainability, Maurits van Joolingen, said.

"Climate change poses profound risks to global pension funds, but also a clear opportunity: an immediate and coordinated low-carbon transition offers the best long-term outcome.

"Delay, by contrast, risks stranded assets, higher inflation, and escalating losses. While no single pension fund can shift the global trajectory alone, the collective influence of institutional investors is substantial.

"Thus, pension funds play a key role in supporting the low-carbon transition for both financial security and societal well-being."

However, the report found that the impact is not the same for all markets, warning that investment decisions that rely solely on traditional metrics risk overlooking the climate risks embedded in regional exposure.

This is particularly concerning given the role of home bias, inherent in domestic pension fund investing, which creates concentrated climate risk where home markets are disproportionately exposed to physical risks.

Ortec's modelling showed that, by 2050, equity markets in countries in Oceania, North America, Asia and southern Europe are projected to underperform by between 41 per cent and 54 per cent in a high warming scenario, largely due to exposure to extreme weather events and resource scarcity.

In contrast, Northern Europe showed a smaller 22 per cent decline thanks to cooler conditions and lower physical risk exposure.
 
“Climate change is systemic, but it does not impact all geographies equally. If superannuation funds are to mitigate climate risk, they must rethink strategic asset allocation to incorporate geographic variation,” Van Joolingen explained.   

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